Economic Update

Sarawak: Protecting growth

Asia | 31 Jan 2012

Mid-January saw some negative credit rating announcements for many European economies, but more positive news came earlier for Sarawak by ratings agency Standard & Poor’s (S&P). While maintaining its “A-“ long-term issuer credit rating, Sarawak enters 2012 – a federal election year – with strong fundamentals and positive sentiments for growth and development.

Though the state will not be immune to global events, most analysts agree that the next 12 months should be largely positive for the state’s economy.

“We affirmed the ratings on Sarawak to reflect the state’s strong operating balance, robust liquid reserves and its supportive relationship with the federal government of Malaysia,” Standard & Poor’s credit analyst, Yee Farn Phua, said in a statement released on December 22.

To be sure, in today’s environment Sarawak’s economic growth is an object worthy of envy for most European counties. In his speech tabling the 2012 budget in November, chief minister Taib Mahmud estimated that in 2011 Sarawak’s GDP grew 4.5% and would grow a further 5% in 2012, on the back of strong domestic demand and the economic activity generated by projects initiated under the 10th Malaysia Plan (10MP) and the Sarawak Corridor of Renewable Energy (SCORE).

Taib said the government expects all the state’s economic sectors to show positive growth this year, spurred by promising regional demand and high commodity prices. Of these sectors, those that stand out are construction and the transport and storage subsector.

The construction sector was estimated to have grown by 6.4% in 2011 due to accelerated implementation of the 10MP, the Economic Transformation Programmes and SCORE development projects, along with a variety of construction activities in the residential and non-residential subsector, the chief minister said. In 2012 the construction sector is expected to continue with a strong growth of 8%, according to Taib.

In addition, the transport and storage subsector is anticipated to expand by 4.7% in 2012, with resource-based manufacturing at the core of this growth, owing to healthy external demand from regional economies, especially rebuilding efforts in Japan.

Another sector expected to post gains this year is the mining and quarrying sector, which should see rises of 3.4% attributed to increases in natural gas production to meet the demand for Sarawak’s liquefied natural gas. This demand is set to be especially high from Japan, which has announced plans to reduce its reliance on nuclear energy. In addition, the state’s agriculture sector is expected to grow by 2.9% in 2012.

The anticipated, auspicious domestic economic conditions mean that in 2012 private consumption is expected to grow by 7.3%, Taib said. This growth is expected to be boosted by positive consumer confidence coming from higher disposable incomes, a positive outlook for businesses and a continuation of the current accommodative monetary policy. Private consumption was expected to have hit 7.1% in 2011.

The 2012 budget projects public investment to increase by 1.2% during the year, as the state’s numerous investment projects, particularly SCORE, ramp up to meet industrial demand. This will also be reflected in private investments, which are expected to rise 8% this year.

However, Sarawak will not be completely immune to the effects of the global economy. Turmoil in international markets, especially the European sovereign debt crisis, could result in a slowing of foreign investment inflows. Europe’s debt woes could also weaken demand for Malaysia’s exports and destabilise capital outflows. In the face of this, some economists expect real GDP growth in the state to be slower than official estimates – as low as 3.6%, according to an economist from RHB Research Institute.

However, if a worsening global economic outlook threatens to decelerate local growth, the Bank Negara Malaysia may consider cutting overnight policy rates in the first half of 2012 to ensure growth doesn’t stall.

Inflation is another potential risk factor. The state’s inflation rate is expected to average 2.8% in 2012, but this could rise if the government follows through on its plans to reduce energy subsidies over the course of the year. In this scenario, input costs will rise and be passed on to consumers in the form of elevated retail and services prices.

With federal general elections coming up in 2012, there is also a widespread expectation that government spending, both from Putrajaya and Kuching, may also have a short-term positive impact on economic growth – even if this also holds potential inflation pitfalls. However, there seems little sense of any political risk ahead as a result of this nationwide ballot, with Sarawak likely to see a continuation of the economic policies that have brought it to where it is now.

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